Regulators must tread carefully to not stifle innovation

By:
Paul Golden
Published on:

While banks continue to devote a lot of resources to compliance activity, there are signs that this investment is having less of a negative impact on service innovation.

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The 2015 global regulatory outlook report published by Kinetic Partners suggests that regulators are devoting a lot of resources to surveillance of technological innovation. Regulatory consulting director, Malin Nilsson, refers to improved communication between industry and regulators and says that draft regulations are "being designed to make industry professionals think twice when it comes to risk without stifling innovation."

But Steve Young, CEO of Citisoft, says he would be surprised if regulators were building a capability to monitor technology changes as they emerge and react accordingly and suggests that European asset managers face particular challenges. "Our US clients are focused on strategy and innovation, whereas in Europe the emphasis over the last few years has been far more on regulation."

According to Young, the dependencies of many business functions and operations across the industry create a large and largely unnoticed risk. "Large parts of the back-office value chain are still reliant on ageing, expensive and cumbersome technology."

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Some clients cite an annual challenge to cut the IT operating cost for a given function by as much as 10%, observes Mike Payne, associate partner, Delta Capita. "With this in mind and assuming a convincing business case is made, real innovation should get funded. However, the internal pipeline of new ideas/funding for proving them may be restricted."

He suggests that maintenance costs still run at up to 80% of IT budgets in many banks, even after rationalization and outsourcing, which means that there is still plenty to do to change the balance between funding innovation for competitiveness and "keeping the lights on".

Over the last three or four years banks have done a lot of tactical, keeping-heads-above-water procurements, according to Noel Montaigue, senior business manager at OpenLink. They have been fixing shortcomings and overcoming immediate regulatory monitoring, reporting and data challenges without the time, budget or manpower to plan strategically and spend innovatively.

However, he feels the tide has started to turn as profitability improves and that it is no longer considered acceptable or responsible for COOs and CTOs to bolt on ad-hoc solutions and isolated modules.

The need for firms to scale their operations in the wake of increased regulation and data volumes is not going to go away anytime soon. That is the view of Neill Vanlint, managing director EMEA and Asia at GoldenSource, who believes that flexibility of data provision is at the heart of this issue.

"Since the financial crisis, institutions have had to go through a long and laborious exercise of gathering, collecting and consolidating data to meet reporting requirements. Now it is time to get that data out of the many rabbit warrens and into the line of sight of those responsible for innovation and attestations."

Regulators are often behind the technology curve because their own systems are not up to date, suggests Venkataraman Bala, chief technology officer banking and capital markets, at CSC. "Some of the regulatory regimes are waking up to this fact and attempting to modernise their infrastructure to better understand the impact of technology on operational risks of the banks they regulate."

According to Steve Grob, director of group strategy at Fidessa, regulation is forcing firms to innovate. "We are seeing a move to look at all areas of workflow and find creative alternatives. Another theme is that firms are reluctant to employ separate technologies discretely, which is too much of an overhead from both a risk and a cost perspective."

He also suggests that regulators could do more to engage directly with the independent software vendor community and that their interaction tends to be more focused on venues, broker dealers and the buy side.

Regulators will be confronted with much more technology disruption over the next few years and will need to be become more involved in monitoring, or even working with, the groups driving this change.

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 Regulators  are still taking a reactive approach to providing guidelines, principles and governance for the communities driving disruption

Bernd Richter, Capco

That is the view of Capco partner Bernd Richter, who acknowledges that some regulators are already anticipating this trend. "However, they are still taking a reactive approach to providing guidelines, principles and governance for the communities driving disruption," he adds.

It can often be difficult for a regulator to understand real world applications, says Kieran Arigho, senior industry consultant financial services United Kingdom and Ireland at Lexmark. He believes a programme based around exchange or secondment would give regulators access to banks considering disruptive technologies and ultimately allow them to build regulations in line with evolving technology solutions.

Regulators could do more to keep pace with changes in technology, but their job is to regulate and in doing so to become experts on the things that will impact either the prudential aspect of the financial markets or customer outcomes, concludes Travers Clarke-Walker, chief marketing officer international group at Fiserv.